Not Strictly a Cash-Flow Decision
So when should companies lease and when should they buy? Snow says the simple truth is that the availability of capital is a dominant factor in deciding whether to lease or buy IT. If you don’t the cash but need the equipment now, leasing is your only option.
Snow, however, also offers several other considerations that may tip the balance in favor of leasing, even for companies with plenty of cash on hand. Those factors include built-in technology refresh options that allow for easy upgrade or expansion of systems during the term of the lease, as well as the flexibility at end of term to purchase the technology, replace it with newer technology or return it.
“For companies where the eventual aim is ownership,” Snow says, “flexible leasing terms, technology-refresh and end-of-term lease options allow them to make informed and controlled decisions about the levels of ownership that suit their balance sheet and cash flow requirements.”
Leasing might also be wise for those facing the challenge of managing fluctuating demand on IT resources. Some leasing plans can be structured on a “pay-per-use” basis, allowing them to match payment to usage, and make budgeting for IT more predictable.
“In terms of support, pay particular attention to how easily you can upgrade your specifications as needs change, and how much support you really have.”
— Clive Longbottom, analyst, Quocirca Ltd.
A wide range of leasing plans and programs are available, he says, with the Fair Market Value (FMV) leases offer the lowest monthly payment as it enables off-balance sheet treatment of assets.
Snow cautions, though, against chasing equipment at the lowest possible monthly payment.
That often can come at the expense of flexibility in the terms of the lease, such as more stringent return conditions at the end of term,” says Snow. “Companies need to weigh their short-term pricing requirements against their requirements two or three years down the road.”
Not for Everyone
Quocirca’s Longbottom, however, isn’t the biggest fan of leasing. He suggests that leasing works best for companies that make lots of changes to their infrastructures, or don’t have much in the way of support skills available. Buying, on the other hand, is better when the organization possesses solid support skills and it is unlikely that it will change things much over a period of some years.
If you do lease, Longbottom recommends building bail-out clauses into the contracts s you can return the kit without too much penalty. Further, he highlights the importance of not being locked into a specific platform or type of equipment for too long a period. Five years can see a world of change in IT, after all. Finally, he cautions those considering leasing to watch out for equipment disposal and support.
“Ensure that disposal is covered under the lease as the legislative climate is making disposal more and more expensive,” says Longbottom. “In terms of support, pay particular attention to how easily you can upgrade your specifications as needs change, and how much support you really have. If you need four-hour turnout and fault fix, make sure that this is covered before you sign anything.”